USD/CAD traded lower on Monday near 1.3659, ending a three-day rise that had taken it to two-week highs. The US Dollar Index was near 100, down from 100.54 on Friday. Canada’s headline CPI rose 0.5% month-on-month in February versus 0.6% expected, after 0.0% in January. Annual CPI slowed to 1.8% year-on-year from 2.3%, below the 1.9% forecast. BoC core CPI increased 0.4% month-on-month, up from 0.2% in January. The annual core rate eased to 2.3% year-on-year from 2.6%.

Canadian Inflation Update

Focus is on the Bank of Canada rate decision on Wednesday, with the policy rate expected to stay at 2.25%. A Reuters poll on 13 March showed 25 of 33 economists expect rates to stay unchanged at least through 2026. Oil supply risks linked to the Strait of Hormuz have pushed prices higher, which can affect inflation and growth in Canada. Markets are also watching the US Federal Reserve, expected to hold rates at 3.25%–3.50% on Wednesday, alongside updated projections and the dot plot. Looking back to this time in 2025, we can see the market was dealing with low Canadian inflation and a major US-Iran conflict. Those factors created a complex picture where high oil prices supported the Canadian dollar, even as domestic data weakened. The situation today is quite different, and our strategy must adapt accordingly.

Strategy Update For Markets

The inflation dynamic has completely shifted from a year ago. While the annual rate was just 1.8% back then, the latest Statistics Canada report for February 2026 shows CPI is now running at a much firmer 2.8%, sitting persistently in the upper end of the Bank of Canada’s target range. This renewed price pressure makes it harder for the central bank to consider easing policy. Similarly, concerns about a deteriorating labor market have faded. The disappointing employment data from early 2025 has been replaced by a surprisingly resilient jobs market, with Canada adding over 40,000 jobs last month, beating expectations. This strength suggests the domestic economy has a stronger foundation now than it did a year ago. The geopolitical risk premium in the oil market has also diminished. With the US-Iran conflict having de-escalated, the supply disruptions through the Strait of Hormuz are no longer a primary driver of prices, and WTI crude has stabilized in the low $80s. This means the Canadian dollar is less supported by external war-related factors and more reliant on its own fundamentals. The wide interest rate differential between the Fed’s 3.25%-3.50% and the BoC’s 2.25% remains a headwind for the Canadian dollar. However, given the recent strength in Canadian inflation and employment, the narrative is shifting. We believe the market will begin to price out any chance of a BoC rate cut this year, which was a dominant theme in 2025. For the coming weeks, we should consider positioning for a cap on USD/CAD upside. The pair’s inability to hold gains above 1.36 suggests strong resistance, and the improving Canadian fundamentals support this view. Selling out-of-the-money call options on USD/CAD could be a prudent way to capitalize on range-bound price action. Create your live VT Markets account and start trading now.

Start trading now – Click here to create your real VT Markets account